Early stage startup investment is the new sweet spot for VC investors

The year 2022 is forming a “Catch-22” scenario in the Indian capital markets. Both secondary and primary markets have shown high volatility this year compared to the 2021 bull market, which also saw the largest number of startups becoming unicorns.

With the beginning of the year 2022, the US and Europe began to show signs of a slowdown that ended up financing winter around the world from the first quarter of 2022.

In the first half of this calendar year, the amount of funding in Indian startups was significantly higher, but was mostly concentrated in early and early stages. According to Entrackr data, about 596 early-stage startups raised funds in the first half of 2022 compared to late/growth stage, which accounts for just 226 deals.

Since the second quarter of 2022, later-stage (post-series A) venture capital funding for Indian startups is slowing, with investors becoming more vigilant and placing smaller, longer-duration bets on early-stage startups amid a correction in global financial markets. and winter funding prevails.

Many venture capital funds have raised new capital to invest in India. So there’s a huge dry powder available with them, but again there’s a catch-22 situation here where the venture capitalists have capital, still, there’s winter funding.

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Investment in early startup stage

In a conversation with investors, we have observed that they have changed their thesis and are very selective in their investment decisions, preferring to invest in Enterprise SaaS, B2B models where the consumption of cash is low and there is recurring income. The valuation has also been corrected by at least 25% in the SaaS and D2C sectors.

One of the reasons investing in early-stage startups remains an attractive proposition for many investors is the odds of exponential growth. Investors want to take advantage of the first-come, first-served opportunity to take the stake at a reasonable valuation and reap a significant return by exiting in the Series A/B or later rounds. Early stage investors have also generated around 10x, 22x, 35x to 80x returns.

Most late-stage startups are burning through cash and those showing near-term earnings visibility can attract venture capital money to fund the winter, like Squad Stake raised Series B and Sunstone raised Series C last month. past.

With the growing chaos around the edtech giant of late, investors in the future might be on the lookout to invest in unicorn startups and thus investing in an early-stage startup might be a better option. and more secure. The numbers corroborate the same too. According to a Tracxn research report, in the first quarter of 2022, early-stage venture capital investments in India (up to Series A rounds) rose more than 28 percent to $1.50 billion from $1.17 billion. past year. Also discussed is that the average size of early-stage deals grew 200% to $3.94 million in the first quarter of FY23 from $1.92 million in the first quarter of 2021.

Investors are also interested in partnering with startups that are creating sustainable business models using technologies likeblock chain,Internet 3.0,artificial intelligence (AI)robotics and the Internet of Things (IoT), among other fields such as D2C. Recently at Swastika Investment banking we got 4 new companies financed in seed stage and series A, but we were unable to get investor interest for startup stage of series B venture capital funds.

Seeing such huge potential in India’s deep tech ecosystem, I believe that early stage startups in tech-based solutions and D2C segment may have imminent growth on par with global tech startups.

Mr. Amit Pamnani, Investment Banking Investment Director at Swastika Investmart Ltd.

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